Get Updates by Email

Monday, 25 April 2016

Panama Papers Shows That National Leaders Are Misers and Penny Pinchers

Of late, the Panama Papers scandal has exploded internationally. Many leaders have been implicated, in the name-and-shame game of identifying who has been storing up riches in offshore accounts. Now, the funny thing about this outcry has been that nearly everyone who has heard of the Panama Papers, says that it is wrong because these people are avoiding paying taxes.

The Panama Papers, In A Nutshell

It is the biggest expose of tax avoidance (or tax evasion, depending on your perception). 11.5 million confidential papers, from the law firm of Mossack Fonseca, were released by an anonymous source to a German newspaper. It was released without any request for payment. The person remains anonymous until today, as she or he had used only secure means of communication to contact the newspaper person. (One can't help wondering whether the anonymous source was a disgruntled intern who wasn't retained.)

From the Panama Papers entry at Wikipedia:
The documents illustrate how wealthy individuals, including public officials, hide assets from public scrutiny. At the time of publication, the papers identified five then-heads of state or government leaders from Argentina, Iceland, Saudi Arabia, Ukraine, and the United Arab Emirates as well as government officials, close relatives, and close associates of various heads of government of more than forty other countries. The British Virgin Islands was home to half of the companies exposed and Hong Kong contained the most affiliated banks, law firms, and middlemen.
Offshore business entities are not, in themselves, illegal. In Malaysia, there is an island called Labuan, which has been designated as an offshore financial center. Malaysia, normally seen as a country with high corporate taxation rate (in comparison with tiny little Singapore), had the balls to establish an offshore center. If that is not validation of the acceptability of "offshore", consider that Singapore, touted as the most livable place in Asia, and Hong Kong, a tax haven, also offer incorporation of offshore companies.

What the Panama Papers has shown, is that people find the idea of their national leaders having offshore corporations (to avoid paying more taxes) distasteful, if not downright abhorrent.

The fact is that it is not illegal for them to open offshore accounts. Think about it: if they were working in foreign jurisdictions, they would be earning and paying taxes to foreign governments. With their wealth parked overseas, in offshore accounts, they are generating income from interest, while shielding their wealth from taxes.

The European Commissioner for Taxation, Pierre Moscovici, has estimated that the tax shelters caused an annual loss of €1 trillion in public finances.

Mr. Fonseca, one of the founders of the Mossack Fonseca, the law firm at the center of the Panama Papers, insisted that his firm has done "nothing wrong". (See and Wall Street Journal.)

A Small Distinction Between Right and Wrong

There is a small distinction that must be made clear. The setting up of foreign offshore corporations by Mossack Fonseca might not, in itself, have been illegal. However, the use of those corporations for illegal purposes, is illegal. Think of it in this way: If you had a knife, the possession of a knife is not illegal. The use of the knife to chop fish meat and carve chunks of beef is not illegal. The use of the knife to kill someone is illegal.

The entry at Wikipedia is dripping with stories of how Mossack Fonseca had been involved in the laundering of illegal funds. (See link above) How true this is, remains to be seen. One such incident cited in the Wikipedia article is the Brink's Mat robbery incident.

How Much Are They Saving?

Now that is a very good question. I don't know the answer. But the figure must be quite staggering, for these clients to even consider pricey lawyers like Mossack Fonseca. Here are some of the big names that have been implicated in the Panama Papers scandal:

  • Iceland's former Prime Minister, Sigmundur Davíð Gunnlaugsson
  • Italy's former Prime Minister, Silvio Berlusconi
  • Malta's Minister for Energy and Water Conservation, Konrad Mizzi, 
  • Associates of Russia's Prime Minister, Vladimir Putin
  • Spain's Minister of Industry, Energy and Tourism, José Manuel Soria 
  • UK's Prime Minister, David Cameron
  • Ukraine's President, Petro Poroshenko
  • India's superstars Amitabh Bachchan and Aishwarya Rai Bachchan
  • Qatar's former Prime Minister, Hamad bin Jassim bin Jaber Al Thani

What I Think

The whole affair makes me think that national leaders, especially heads of government, are misers and penny pinchers. Or, they could simply be savvy and sophisticated investors.

But first a question: Why hide your money if you call for transparency and good governance? I think the answer to this, is that they need to put on a show. They need to appear clean, and they may want to appear clean, in order to continue being liked by the electorate (voters). Nobody likes a leader who enriches himself or herself while in office. But the truth is this: That leaders can often better enrich themselves while in office, than after it. Few leaders make their fortune before entering the office, although, a great many of them come from good backgrounds, which is euphemistically called "old money". (It means that their ancestors have great wealth.)

And these are the same kinds of leaders who, in an effort to draw away attention from themselves, launch vigorous investigations into the rich and elite classes of their own society. They hound those who have made money, perhaps legally, in an effort of catching some of those less savvy persons (less savvy because they did not use Mossack Fonseca to set up an offshore corporation in a tax haven) so that the government can nod its head and say, "Well done! You have managed to recover our taxpayers' money. We love you!"

To these leaders, I can only recommend that they clean up their act and learn from Bill Clinton. Bill currently makes a lot of money by speaking. In 2016, CNN reported that Bill Clinton and his wife, presidential hopeful Hillary Clinton, made more than $153 million from speaking fees between 2001 to May 2015. Surprisingly, Bill Clinton's average per-speech income was $207,225.40 while his wife's average per-speech income was $235,304.35. Not bad -- I guess the Clintons must be pretty frugal, too.

Panama Papers in a Nutshell OR A Small Distinction Between Right and Wrong OR How Much Are They Saving OR What I Think